Categories

Credit Card Basics

How to Calculate Credit Card Utilization

Through April 20, 2021, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

Your credit utilization ratio is a number that plays an important role in your credit scores—and one you can improve easily when you pay down your credit card balances. To calculate your credit utilization ratio, use your credit report to compare your credit cards' balances to their credit limits. Divide the balance by the limit (or total balances by total limits) to find your individual and overall credit utilization ratios.

Your utilization ratio is an important factor in determining your credit scores, and the lower your utilization, the better it is for your scores. Read on to find out how to calculate your utilization—and how to improve it.

Calculating Your Credit Utilization Ratio

You can calculate your credit utilization ratio for each of your credit cards, and your total utilization ratio for all your credit cards—and you should, because credit scoring models take both of these calculations into account when determining your credit scores.

Credit utilization ratios depend on the numbers in your credit report, not your current account balances. So the first step is to review your credit report. You can get a free Experian credit report every 30 days, or a free report from each of the credit reporting agencies (Experian, TransUnion and Equifax) once a year at AnnualCreditReport.com.

Once you have your credit report, divide each credit card's balance by the card's credit limit. For example, if a card's balance is $2,500 and the credit limit is $5,000, then the result is 0.5. Multiply by 100 to see the result as a percentage—50%. That is your credit utilization ratio for that card.

If you have multiple credit cards, add up all their balances and divide that total by the sum of the cards' credit limits. Perhaps you have three cards with balances of $500, $1,500 and $0, and their credit limits are $3,000, $5,000 and $2,000. The total balance ($2,000) divided by the total credit limit ($10,000) gives you an overall utilization rate of 0.2, or 20%.

Your utilization ratio will change as your credit card issuers send updates to the credit bureaus. Generally, this happens around the end of your statement period, which is why you can pay your credit card bill in full each month and still have a high utilization rate that hurts your credit scores.

How Does Credit Utilization Affect Your Credit Scores?

Your utilization ratio can impact both your VantageScore® and FICO® credit scores. In either case, your individual credit cards' utilization rates and your overall utilization rate (if you have several cards) are important to your credit scores.

For VantageScore credit scores, your utilization falls within the "total credit usage, balance and available credit" category. The company lists this as "extremely influential" in determining your VantageScore 4.0 credit score.

With FICO® Scores , your utilization is part of the "amounts owed" category, which makes up approximately 30% of your FICO® Score. But utilization is only a part of the category, which also includes how much you owe on various accounts and how many accounts have balances.

A lower utilization ratio is better than a high utilization ratio for all your credit scores. However, sometimes having a low utilization rate is better than having no utilization.

Also, keep in mind most credit scoring models only look at your most recently reported balances. Having an exceptionally high utilization rate may hurt your scores one month, but bringing down your reported balance and lowering your utilization could help your scores the next.

Because of this, your credit utilization ratio is one of the things you can address if you want to improve your scores quickly.

Keep in mind, however, that the latest VantageScore and FICO® Score models consider trended data, which may include your utilization rates over time. If you tend to carry a balance and only make minimum payments, that could hurt those scores. If you pay your bill in full each month, that could help those scores—even if you occasionally have a high utilization rate.

What Is a Good Credit Utilization Ratio?

A good utilization ratio is a low utilization ratio, such as 1% to 9%. Higher ratios could indicate difficulty affording future bill payments, which is why high utilization rates can hurt your credit scores.

You could still have a good or excellent score with a utilization rate of 10% or higher, but you generally want to aim for a ratio below 30%. A utilization ratio topping 30% can do more serious damage to your credit scores. Ideally, keep your ratio in the low single digits for the best credit scores.

How to Lower Your Credit Utilization Ratio

The utilization ratio calculation looks at two numbers: your balance and your credit limit. Any actions that decrease your reported balances or increase your reported credit limits can lower your utilization rate. These could include:

  • Making early credit card payments: Paying down your credit card balance before the end of your statement period (when many card issuers report to the credit bureaus) could lead to a lower balance being reported.
  • Using credit cards less often: Using other payment methods, such as debit cards or cash, will also lower credit card balance and utilization rate.
  • Increasing your card's credit limit: You can ask your card issuer to increase your credit limit. This can sometimes result in a hard inquiry, however, which could temporarily hurt your credit scores a little. Also, it may only be worth asking if your credit or income has increased since you first opened the card.
  • Opening a new card: Opening a new credit card will also increase your available credit, which can lower your overall utilization rate. However, you'll want to find a credit card that offers additional benefits as well.
  • Using a personal loan to consolidate debt: If you're working to pay off credit card debt, you could look into consolidation with a personal loan. You may be able to save money if you qualify for a loan with a low interest rate, and you'll lower your utilization rate by moving the debt from a revolving to installment account. Just resist the temptation to build up a balance on your newly zeroed-out cards.
  • Keeping credit cards open: There can be good reasons to close credit cards, such as an annual fee when you don't receive enough benefits to justify it or an open card leading to overspending. However, keeping credit cards open also increases your available credit limit, which can lower your utilization rate.

You don't need to use every strategy to maintain a low utilization rate—pick and choose what works for you and your financial situation.

Track Your Credit Score for Free

Ideally, you can maintain low utilization and pay your bills in full to avoid paying interest. But don't worry too much if you occasionally have a high utilization ratio.

You may see your score drop for a time, but your score can also increase as you pay off your credit card balance. And other factors, such as whether you pay your bills on time, can be even more important to building good credit.

You can also sign up for Experian's free credit report and FICO® Score monitoring. When you log in to your account, the program automatically calculates your utilization ratio based on your Experian credit report (both your overall utilization and utilization for each account), and shows you which other factors are most impacting your score.